ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Sharing of Goods and Services Tax Revenues

A Case of Unequal Fiscal Federalism?

The operation of the Integrated Goods and Services Tax Act, 2017 and the Goods and Services Tax (Compensation to States) Act, 2017 is examined to identify the distortions that have crept into this devolution channel. These problems can be successfully addressed if the existing laws are implemented completely and consistently. This is not the case now.

 The author is grateful for the insightful comments on earlier versions of this paper received from the participants of the seminar on “Issues in India’s Macroeconomic Policy and Regulation” held at the Mumbai School of Economics and Public Policy on 15 March 2019 and the round table on “Fiscal Federalism in India—Contemporary Perspectives” organised by the Madras School of Economics and E&Y at Chennai on 23 February 2019. A summary of this paper entitled “GST Revenues Conceal More Than They Reveal” appeared in the Business Standard of 6 March 2019. The usual disclaimers apply.

Fiscal federalism envisages the empowerment of revenue capacities and the allocation of expenditure responsibi­lities amongst the different layers of a federation and their fulfilment in an efficient and effective manner. The smooth running of the federation is often tested in matters which are the shared obligations of both layers of the federation. Challenges to the harmonious functioning of the federation may arise when the implementation of a countrywide policy affects revenue at the subnational level. The implementation of the goods and services tax (GST) is one such case.

This paper examines the impact of sharing of GST revenues on fiscal federalism. The analysis is restricted to the operations of only two of the five GST enactments—the Integrated Goods and Services Tax (IGST) Act, 2017 and the GST (Compensation to States) Act, 2017. The operation of both these acts is examined from four perspectives. First, the need for the legislation. Second, the legal form it has taken. Third, its implementation in practice. Fourth, its impact on sharing of revenues between the centre and the states. The early part of this paper focuses on these issues. Then it highlights this evaluation in the context of the new channel opened up for devolving these two taxes from the centre to the states and identifies the distortions that have crept into them. It then highlights the unorthodox definition and disposition of the IGST and compensation cess revenue which appears to overreport revenue. The paper then scrutinises the gross GST revenue collections reported for 2017–18 for which official data are now available from several sources. It contrasts it with the GST revenue computed to be consistent with legal requirements and arrives at a difference in Government of India’s (GoI) GST revenue for 2017–18 of 1,53,997 crore. Finally, the paper concludes with an examination of how some of these developments lead to a perception of unequal fiscal federalism in the operations of the GST Council and suggests how this can be resolved.

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Updated On : 25th Jul, 2021
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